Taking money out of your 401(k) still feels uncomfortable, even though you saved it for retirement. How much can you use each month and still have enough for the years ahead?
Your account balance alone can’t answer that.
To pay yourself in retirement, you need to know what a month of your life costs. Include the things you want to enJOY now that you have more time. How much of that will Social Security cover? If you have a pension, count that payment too. The rest needs to come from savings. Remember to include any taxes on withdrawals so you know how much you’ll have left to spend.
You want to understand how much you will have left to spend after those taxes are paid.
What Will It Cost You to enJOY Retirement?
Your spending over the past year is a useful place to start. Add up what went out of your bank accounts and onto your credit cards, without counting credit card payments twice. Divide the year’s spending by 12 to see what you spent per month on average. Using a full year also captures bills you don’t pay every month, like an annual insurance premium.
Adjust it for retirement. Commuting may cost less, but health insurance could cost more.
Think about how you want to spend your time now that you do not have to go to work everyday. Maybe you’d like to see your grandchildren more often. Put those visits in the budget, including what you’ll spend while you’re there. That can help you enJOY the visit without adding up the cost in your head.
Calculate What Your Savings Must Cover
If you spend $15,000 a month and receive $5,000 from Social Security and a pension after taxes and other deductions, your savings need to provide $10,000 a month. You may need to take out more to cover taxes on the withdrawals.
Can you keep taking that much out throughout retirement? Check that against what you’ve saved and how many years the money may need to last.
If you stop working before Social Security starts, include enough from savings to cover those missing payments until benefits begin.
Know What You’ll Have Left After Taxes
Where you take the money from affects how much you’ll have left to spend. Money withdrawn from a pretax 401(k) generally counts as taxable income. Qualified Roth withdrawals are tax-free. If you sell investments in a brokerage account, you generally owe taxes on the gain, not the full amount you take out.
If you’re thinking about moving money into a Roth account, there are Roth conversion mistakes worth checking before you make the move.
Before setting up monthly payments, check how much tax you’ll owe. The amount automatically withheld from your withdrawals may be too much or too little.
How Will You Get Paid Each Month in Retirement?
Contact your 401(k) provider about sending money to your bank account each month. Ask whether there’s a fee and how to change the amount later.
Choose a payment date that gives the money time to reach your bank before bills come due. When the first payment arrives, make sure it’s the amount you expected. Also ask your provider how they’ll cover each withdrawal.
Will it come from cash already in your 401(k), or will investments need to be sold?
Keeping some cash available for upcoming payments can give you more choice about when to sell. Review it regularly so there’s enough for the next payments.
Make Room for Spending That Isn’t Monthly
Buying a vacation home on the lake or helping an adult child with a down payment on their first home may require a larger withdrawal than your monthly budget allows.
Work out how much you’d need to take out, including any taxes you’d owe. If you’re buying the lake house, put property taxes, insurance and upkeep in your budget too.
Before you commit, look at what would be left in savings and how much you’d still need from it each month.
Knowing what the purchase or gift would mean for you can help you feel comfortable saying yes and enJOYing what it makes possible.
You’ve Saved for Retirement. What Can You Spend?
Knowing how much you can pay yourself each month can make it easier to enJOY the money you’ve saved.
If you haven’t worked out that amount yet, text me at 631-230-6264.
Let’s talk about how you want to enJOY retirement and how to pay for it.
Frequently Asked Questions
Can your 401(k) pay you each month?
Your plan may let you set up monthly payments to your bank account. Ask your 401(k) provider what’s available. Retiring doesn’t automatically start payments.
Do you have to spend your Required Minimum Distribution (RMD)?
No. The required amount must leave your retirement account, but you don’t have to spend it. After covering any taxes, you can save or invest the money you don’t need.
Can you use your 401(k) while getting Social Security?
Yes. You can use both to cover your retirement spending. Social Security doesn’t treat 401(k) withdrawals as earnings from work, so they won’t reduce your benefits under its earnings limit. But taxable withdrawals may mean paying income tax on more of your Social Security.
Can you keep your 401(k) after you retire?
Often, yes. An IRA rollover isn’t required simply because you’ve retired. Ask your former employer’s plan about leaving the money there and taking payments. Before moving it, check what would change, including fees and protection from creditors. If you’ll need the money before 59½, check whether a rollover would mean losing an exception to the early withdrawal tax. You can read more about leaving your 401(k) where it is or moving it to another account.
What happens if you withdraw from your 401(k) before 59½?
Your plan may let you take money out, but first check whether you’d owe the extra 10% federal tax. Without an exception, that tax generally applies to the taxable amount you take out. Retiring early doesn’t automatically remove that tax.
